Will Investors Come Around to Sports Betting?

Sportsbooks may have successfully burst onto America’s legalized sports betting industry but concerns over profitability has seen everyone cut back

There was a moment at the start of the 2021 football season when American sports finally embraced online betting. Before the NFL regular season, many Americans watching sports on TV had a fair inkling of what sports betting was, who the main players in the business were, and even in which states it is legal.

But as soon as that first football was kicked in the new season, the entire country squinted from the dazzling light of sports betting commercials.

In a single season, America’s biggest casinos and gambling firms spent billions of dollars on advertising and marketing in order to attract new players to an industry that has rapidly expanded, state by state, over the past few years.

It was the football season that finally cracked a market that has been teetering on an infatuation with sports betting for years. Indeed, New York’s entry into the sports betting community in January 2022 was, for many gambling firms, the jewell in the crown. Take a bite of the Big Apple and the profits would surely follow. Right?

Well, not quite. Since the start of 2021 share prices of America’s biggest sports gambling firms have fallen. DraftKings stock is down 68.3%, while FanDuel and Caesars have also taken hits. Investors now aren’t so keen on injecting liquidity into the market as they were – and it’s not hard to see why.

Fall In Stock Prices Explained

The reason for the American betting industry’s plunge in stock value is, according to Daniel Adam, senior analyst at Loop Capital Markets, because of ad spend. So aggressively have DraftKings (NASDAQ: DKNG) and FanDuel spent on commercial success, for example, that they’ve drained their cash reserves.

“That’s really the main driver in the underperformance in the share price,” Adam told CBS MoneyWatch. Indeed, Flutter (LON: FLTR) and DraftKings spent $875m and $981m respectively on marketing ventures in 2021 alone. Yes, the companies also made money, but the spend was huge.

The reason these companies splashed so much cash on marketing was because they were at the forefront of America’s online gambling gold rush. Casino companies and betting firms that have been around for generations practically obliged themselves to invest in this growth market which promises to be worth as much as $66bn in 2025.

They burned through investor funds and the marketing worked. It is thought 31 million Americans wagered on the Super Bowl this year, spending as much as $7bn on a single event. Yet even a small slice of that pie per state required heavy investment in commercials and advertising to ensure a potential customer chose one betting site over another.

Almost as soon as the last scrap of confetti landed on the SoFi Stadium field this February did the gambling firms turn the taps off their marketing spend. Caesars and BetMGM have reigned in their cash, as have their competitors.

It is as though the first gold rush is over. Caesars (NASDAQ: CZR) did so well with brand recognition during the peak of their spending that they’ve claimed 21% of America’s online betting market. They’re happy sitting on this position.

Sports Betting Company Share Prices

Will Investors Come Around to Sports Betting?

And all this leads to the question – will investors begin again to pump money into betting firms? The answer: almost certainly yes.

Wall Street knows a quick buck when it sees it and America’s financial institutions aren’t shy of investing in a growth market. In fact, the New York Times was reporting as far back as 2005 that online betting companies were attracting the attention of Wall Street – even though internet wagering was illegal at the time. 

Investors have always propped up the gambling industry. After all, casinos in Vegas need billions of dollars to build hotel resorts before recouping the money years later from guests. And with share prices currently as low as they are, there is every reason to believe the next flurry of investment is right around the corner.

However, this may well be different this year. The NBA playoffs and the football season are the two most important period of the calendar for sportsbooks. So don’t be surprized if we see commercial spikes during these events, and little in between.